EU summit/G20 to kick off the final phase of Maximum Intervention

Going into this weekend’s EU summit, the market is still making the bet that Germany will choose solidarity over fiscal discipline, the recent lowering of expectations from German government sources notwithstanding. This looks increasingly like an “all in” round of betting in a hand of poker – the market better hope it is right.

Da Vinci, scientist as well as artist, stated that simplicity is the ultimate sophistication. Using that as a vantage point for observing the current EU crisis, we will now predict (read: stick our necks out with little if any confidence in our powers of foresight) that we are on the cusp of a transition to a paradigm of “less is more”. This won’t be a sudden event. In fact, the current EFSF as SPV and partial insurance proposals read like CDO squared and cubed prospectuses that marked the final phase of the US subprime bubble. This bailout attempt will be the most complicated yet. But let’s boil it down to the simplest of facts here: the debt must be destroyed and this is the final effort that ironically marks the most frantic attempt to keep it alive, but also the first effort at getting to the root of the problem with Greek haircuts.

From here on out, we will see more extend-and-pretend measures, but the ratio of those measures to the inexorable necessity to destroy the debt and extend accountability for past bad decision making will shift more and more in favour of the latter. The cost for this will be a great deal of turmoil – perhaps 12-24 months of real pain, as entitlement expectations are gutted and uncertainty. # But the long term benefits of dismounting the hamster wheel of extend and pretend will be immeasurably for the greater good. This is forest fire economics, after all: apparent devastation as the old forest is partially destroyed, but that destruction is also a renewal that allows for a more fertile, better quality ecosystem to spring up in its place.

After all, there are three critical weaknesses in our global economy today:

• A dependence on increasingly difficult to extract energy sources
• Lack of risk capital as the public sector crowds out the private sector
• Global imbalances from extreme globalization

So let’s stop applying all of our capital to a public sector that is only interested in making good on the debt of past mistakes because of the risk of instability and that continues to avoid the dire need for accountability and a rationalization of over-generous entitlement spending. Instead let’s consider how we can approach the future: with new private pools of capital aimed at tackling the challenges of a new economy that is also one of “less is more”, i.e, more activity based on new and fewer energy resource inputs. Let’s also look at how we can work against the imbalances created by globalization rather than continuing endlessly to add to them.

So forget EU summit and G20 - whatever they come up with will be more extend and pretend - the only thing we can hope is that we see some element of reality – haircuts on Greek debt - enter the discussion, which could, just could be the lead point of the wedge of reality that eventually pries us loose from the extend and pretend process and leads us more directly to Crisis 2.0 – the needed turning point upon which a better future hinges. Sometimes we've been called the “princes of darkness” on occasion because of gloomy outlooks, but lets look at the alternatives here and hopefully we can all agree that we need a proper sunset and bit of night-time before the dawn of a new and better day can begin.

Steen Jakobsen and John J. Hardy 

 

From: http://www.tradingfloor.com